Investment trust plan to increase property supply

Gordon Brown said yesterday that he was considering the introduction of new tax rules to allow the operation of US-style property investment trusts.

The chancellor's announcement followed a recommendation in the Barker review of housing supply, to encourage institutional investors to put money into letting property and increase the size of Britain's rental market.

In the United States, Japan and Australia, real estate investment trusts - or REITs - operate as collective schemes that invest in properties, giving trust holders the revenue from the rental income, and capital appreciations from holding the property.

Real estate investment trusts were first introduced in America in 1960, and by last year there were 180 trusts registered with the securities and exchange commission, controlling total assets worth $300bn (£200bn). The majority of the trusts are listed on US stock markets.

In the US, the trusts are required to pay at least 90% of their taxable income to their shareholders each year, with the REIT deducting dividends paid to its shareholders from its corporation tax - ensuring that an investment in a real estate trust is only taxed once.

"It appears likely that the consultation will cover commercial as well as residential property," said Charles Beer, a tax partner at KPMG's real estate advisory service.

"If such a vehicle is introduced it will potentially give a big boost to the private rented sector, and also allow small investors much better access to the commercial property market."

The Treasury said that consultation on the trusts will begin following the Budget in spring next year, meaning that any proposal is unlikely to be implemented before 2005.

"A key problem is that residential [property] in the UK is expensive to administer and generates low income returns and yields," said Alec Pelmore, a property market analyst at Merrill Lynch.

"We are concerned there may well be stings in the tail which could temper enthusiasm, since we believe that the government will continue to view property as a potential source of tax."

The introduction of the trusts was warmly applauded by listed property companies, some of which are likely to convert into the new, tax-efficient form.

The Treasury said it plans to impose an "entry charge" exit tax for any property company conversions into trusts.